AI Takes the Wheel

From China’s rapid electric vehicle adoption to the rise of robotaxis, humanoids, and flying vehicles, our analysts Adam Jonas and Tim Hsiao discuss how AI is revolutionizing the global auto industry.

Read more insights from Morgan Stanley.

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Adam Jonas: Welcome to Thoughts on the Market. I'm Adam Jonas. I lead Morgan Stanley's Research Department's efforts on embodied AI and humanoid robots. 

Tim Hsiao: And I'm Tim Hsiao, Greater China Auto Analyst. 

Adam Jonas: Today – how the global auto industry is evolving from horsepower to brainpower with the help of AI. 

It's Thursday, August 21st at 9am in New York. 

Tim Hsiao: And 9pm in Hong Kong. 

Adam Jonas: From Detroit to Stuttgart to Shanghai, automakers are making big investments in AI. In fact, AI is the engine behind what we think will be a $200 billion self-driving vehicle market by 2030. Tim, you believe that nearly 30 percent of vehicles sold globally by 2030 will be equipped with Level 2+ smart driving features that can control steering, acceleration, braking, and even some hands-off driving. We expect China to account for 60 percent of these vehicles by 2030. 

What's driving this rapid adoption in China and how does it compare to the rest of the world? 

Tim Hsiao: China has the largest EV market globally, and the country’s EV sales are not only making up over 50 percent of the new car sales locally in China but also accounting for over 50 percent of the global EV sales. As a result, the market is experiencing intense competition. And the car makers are keen to differentiate with the technological innovation, to which smart driving serve[s] as the most effective means. This together with the AI breakthrough enables China to aggressively roll out Level 2+ urban navigation on autopilot. In the meantime, Chinese government support, and cost competitive supply chains also helps. 

So, we are looking for China's the adoption of Level 2+ smart driving on passenger vehicle to reach 25 percent by end of this year, and 60 percent by 2030 versus 6 percent and 17 percent for the rest of the world during the same period. 

Adam Jonas: How is China balancing an aggressive rollout with safety and compliance, especially as it moves towards even greater vehicle automation going forward? 

Tim Hsiao: Right. That's a great and a relevant question because over the years, China has made significant strides in developing a comprehensive regulatory framework for autonomous vehicles. For example, China was already implementing its strategies for innovation and the development of autonomous vehicles in 2022 and had proved several auto OEM to roll out Level 3 pilot programs in 2023. 

Although China has been implementing stricter requirements since early this year; for example, banning terms like autonomous driving in advertisement and requiring stricter testing, we still believe more detailed industry standard and regulatory measures will facilitate development and adoption of Level 2+ Smart driving. And this is important to prevent, you know, the bad money from driving out goods. 

Adam Jonas: One way people might encounter this technology is through robotaxis. Now, robotaxis are gaining traction in China's major cities, as you've been reporting. What's the outlook for Level 4 adoption and how would this reshape urban mobility? 

Tim Hsiao: The size of Level 4+ robotaxi fleet stays small at the moment in China, with less than 1 percent penetration rate. But we've started seeing accelerating roll out of robotaxi operation in major cities since early this year. So, by 2030, we are looking for Level 4+ robotaxis to account for 8 percent of China's total taxi and ride sharing fleet size by 2030. So, this adoption is facilitated by robust regulatory frameworks, including designated test zones and the clear safety guidance. We believe the proliferation of a Level 4 robotaxi will eventually reshape the urban mobility by meaningfully reducing transportation costs, alleviating traffic congestion through optimized routing and potentially reducing accidents. 

So, Adam, that's the outlook for China. But looking at the global trends beyond China, what are the biggest global revenue opportunities in your view? Is that going to be hardware, software, or something else? 

Adam Jonas: We are entering a new scientific era where the AI world, the software world is coming into fa